Making Credit Suisse Swiss Again Drives Its Turnaround

LONDON -- Tidjane Thiam is putting the "Suisse" back into Credit Suisse.

Two years into a three-year overhaul, the Credit Suisse Group AG chief executive has returned the banking giant to its Alpine roots by building up its Swiss unit and, more important, expanding its management of wealthy clients' money, long a staple of Swiss banks.

The process has been rocky because it meant scaling back investment banking and moving the bank's power centers from New York and London to Zurich, while selling toxic assets and settling years-old legal claims. As a result, Credit Suisse posted losses in 2015 and 2016.

But it has paid off recently, with profit of 1.1 billion Swiss francs ($1.1 billion) through September 30 on 4% revenue growth. After battering the bank's stock price last year amid doubts over its strategy, investors have lifted shares by nearly 70% since mid-2016. Still, they remain 30% below from when Mr. Thiam launched the strategy in October 2015.

That is largely because of $10 billion in new equity the bank issued to boost capital, partly so that it could hang on to its prized Swiss unit. Its total market capitalization is back where it was before the revamp began.

"Based on our heritage, Swiss identity and our strengths, this ambition of being a leading wealth manager was the right one," Mr. Thiam said in an interview last week. "When we go abroad, being Swiss is a positive for all our potential clients."

Mr. Thiam -- who comes from Ivory Coast, was educated in Paris and spent much of his career in London, most recently as CEO of U.K. insurer Prudential -- would seem an unlikely champion of Swiss banking, an industry as closely associated with Switzerland as skiing and watches.

Shrinking the bank was a key first step.

At the bank's investors' day conference last week in London, Credit Suisse announced cost-savings targets and said it would return half of its profit to shareholders in 2019 and 2020 through share buybacks and dividends, prompting a rise in shares. Analysts were upbeat in particular about the target to bring total costs from around 18 billion francs this year to 16.5-17 billion francs by 2019, as well as the bank's use of fintech to cut compliance costs.

There are risks to the bank's focus on its home turf while managing money globally. Credit Suisse is now slimmer than it once was and less exposed to trading and investment banking, which, though risky, can be highly profitable. While Switzerland is one of the safest markets in the world, the country also has negative interest rates and a frothy housing market, both of which could cause trouble for its banks.

U.S. tax reform is another uncertainty. Although it could be a positive in the long term by raising earnings and economic activity, Credit Suisse and other banks would see a decline in the value of deferred tax assets -- which are tax credits and deductions from crisis-era financial losses -- if the corporate tax rate is cut from 35% to 20%. Credit Suisse would have to take a $2.1 billion charge against profit the year the bill is signed, though it wouldn't affect the bank's capital base.

Looking ahead, much depends on whether Credit Suisse can pivot from what Mr. Thiam dubbed the "Greek tragedy" of 2016, when the bank was beset by heavy losses and internal strife, to a "virtuous circle" whereby wealth management and investment banking generate fees from rich clients.

A promising trend: Asia is producing one new billionaire -- or potential client -- every other day. "What he's doing in wealth management is internationalizing it toward Asia. They profit from the Swiss label and Swiss reputation, but the real business is in Asia," said Tobias Straumann, a lecturer at University of Zurich.

It is a crowded field. Credit Suisse's biggest Swiss competitors including UBS Group AG have pushed aggressively into Asian wealth management. Credit Suisse's 190 billion francs in managed wealth there only account for about 2% of total wealth in the region, Mr. Thiam said. "There's so much growth to go for. There's no way we're going to run into each other."

To succeed, Mr. Thiam, 55, must integrate his slimmer investment bank into a one-stop shop for wealth management, lending and advisory services. An example: a client in Southeast Asia invested $245 million with Credit Suisse's wealth managers. He then hired it to finance construction of an $850 million factory. The investor is using the bank to launch an initial public offering in two years' time.

"You get into this virtuous circle, and he keeps adding to his $245 million," Mr. Thiam said.

But it hasn't been a smooth ride. Financial markets grew risk-averse after Credit Suisse disclosed its new direction, making it harder to sell tens of billions of dollars of complex, long-term derivatives and other assets accumulated before the financial crisis and its aftermath.

"It was the worst kind of Greek tragedy moment," Mr. Thiam said. "You come in saying you want to stop doing A, and A blows up in your face before you can actually get rid of it."

For his part, Mr. Thiam insists that 2016 was actually his team's best year so far. The key is whether investors and the Swiss public come around to that view.

"I think people are just happy that somebody is cleaning up the mess; that has been overdue for a long time," the University of Zurich's Mr. Straumann said.